Depreciation in a Sole Trader

Depreciation in a Sole Trader

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Hi Guys,

Hoping you can help. I have done a set of sole trader accounts including a balance sheet and little bit confused. I have a net profit but when i depreciate the assets, the profit falls (obviously) and then the amount that gets carried to the capital account is the "less depn amount". Is this correct? Will I then do a seperate calculation for tax calc and add back the depn to get the taxable profit and subject it to the usual tax rules? My question is that if I do it like that, then the capital account amount is the less depn amount so potential for drawings is less. Am i missing something obvious here?

HELP!!!

Thanks guys.

Replies (18)

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By AndrewSullivan
24th Apr 2012 16:29

Correct

The amount that get's transferred to capital account will be the net profit per the accounts (after depn charges). The accounts wouldn't balance else........

Your tax calc will start with profit per a/cs, and then you make the relevant adjustments to get your taxable profit. 

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By khalm0
24th Apr 2012 16:52

Thanks for that. Am i correct in saying that the capital acounts can be drawn upon any time and if in the event of converting to a limited company, then the capital accounts convert to directors loan?

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By mrsksimmons
24th Apr 2012 16:53

Yes this is correct, the amount carried to your capital account is your accounting profit. As you have said you start with this accounting profit and add back non tax deductible items such as depreciation to get to your taxable profit. Remember you also need to deduct other items that are tax deductible such as annual investment allowances and other writing down capital allowances.

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By khalm0
24th Apr 2012 16:55

Great, and the conversion to limited? Am i corerect on that?

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By mrsksimmons
24th Apr 2012 16:59

No if incorporated, new financial statements commence from the date of incorporation. The sole trader has to account for selling his business to the limited company. There is incorporation relief available for this in order to reduce any capital gain.

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Replying to RFSummers:
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By mrsksimmons
24th Apr 2012 17:02

Also assets can be transferred at tax written down value or market value.

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7om
By Tom 7000
27th Apr 2012 12:09

Why bother with a balance sheet for a sole trader. HMRC dont require it.

You could also say why bother with depreciation if you are just going to add it back in the tax comp too...

Are you just doing unnecessary work?

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By sneeze
27th Apr 2012 12:24

Why bother ? !

I'm sorry, Tom7000, but surely the accounts should present a "true & fair view" - if the assets weren't shown at their realistic value, the accounts are potentially not fit for purpose ?

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By pawncob
27th Apr 2012 12:29

accountancy?

@Tom7000.

 

It proves the accounts are correct. I've yet to meet the "perfect" accontant who never makes misteaks!

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7om
By Tom 7000
27th Apr 2012 13:47

True and Fair View

@ sneeze...indeed ..whats the purpose?  HMRC arent interested in the assets and depreciation  just the capital allowances. ( I am also not convinced HMRC are interested in a true and fair view either) So why bother with a balance sheet showing a van and 6 spanners  being depreciated that HMRC dont want, the client doesnt want and you do it because...we always have...

@pawncob...I cant see how producing a balance sheet proves the accounts are corrrect. It shows your double entry works, and I will give you the point that it could  help larger business...but come on guys if they were larger you would have incorporated them by now?? Surely at the micro level where all the clients have is a dozen CIS vouchers and a bag of petrol receipts...what is a balance sheet telling you....

His cis voucher got paid in the next month

He has some money in his bank account which is his or his businesses or a mix

He has a van that is being depreciated that may or may not agree to capital allowances

He hasnt paid his phone bill yet

 

Ok it tells you that and what use is it to anyone? So why should the client pay for it. Its not going to tell you that he missed out 4  petrol receipts that he paid cash for.

 

The only thing I can think it is good for is that the clients have no idea what a balance sheet is, its some type of accounting wizardry that is mandatory and they couldnt possibly do and thats why accountants charge a lot...That works ;o)

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By weaversmiths
27th Apr 2012 15:31

"The only thing I can think

"The only thing I can think it is good for is that the clients have no idea what a balance sheet is, its some type of accounting wizardry that is mandatory and they couldnt possibly do and thats why accountants charge a lot...That works ;o)"

I absolutely agree with this - sometimes when I have taken over from another accountant with a bound wad of accounts from a previous year I have found it to be utter twaddle. 

When I first started out in 1996 I was advised by a friendly Tax Inspector not to send them a Balance Sheet for a small sole trader  because (a) most of them could not read or understand one and (b) it gave a "foot in the door" for an investigation with those that could understand. As long as you do honest accounts that is enough. I have never had a client who asked for one. P&L and CA sheet only - bound, of course..

TheAncientOne

 

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By Wilbur
27th Apr 2012 18:25

Got to agree with Tom 7000

The client sees a reduced profit figure, you possibly (probably) charge him more for the privilege, and he won't understand depreciation anyway...

Isn't depreciation just an accounting term that has very little, if any, basis in the real world?

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By keithas
28th Apr 2012 00:08

In defence of depreciation

When I was studying accountancy I learnt such things as "discounted cash flow" which was much too esoteric and have not found a need to use in a career of 40 years+.

But depreciation is an entirely different matter: it's not just something made up to justify our jobs, as some here seem to imply. It, surely, has its basis in real life i.e. if you buy an expensive asset for your business that is going to last several years, its annual cost to the business is....      well we all know how to work it out. It also means that whether you lease or buy outright, you get the same bottom line - who could disagree with that?

I have yet to meet a director, partner, manager or anyone who has found this concept too difficult to grasp.

For those who don't believe in depreciation, there must be some calculations done post P & L to allow for the skewing effects of large capital purchases so why not just put it in the P & L anyway.

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Replying to adam.arca:
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By Wilbur
28th Apr 2012 09:52

I still agree with Tom 7000

keithas wrote:

I have yet to meet a director, partner, manager or anyone who has found this concept too difficult to grasp.

 

The initial query was re. Sole Trades... as was my previous post.

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By petersaxton
28th Apr 2012 10:45

Overstating profits

If you don't include depreciation you are overstating profits.

Just because it doesn't affect the tax bill is irrelevant.

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By Stalytax
30th Apr 2012 12:48

I only produce a balance sheet for a sole trader if specifically asked for one, however I do produce under 'notes' a depreciation calculation showing how the figure in the P&L account came about.

This is added back in the first part of my tax calculation, before Capital Allowances are applied.

 

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By petersaxton
30th Apr 2012 13:46

Fixed asset register

I prepare a fixed asset register. This ensures I don't over calculate on depreciation. I have seen many accountants overcalculate because they keep taking 25% of the cost even though they have depreciated more than 100% of some assets.

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By ShirleyM
30th Apr 2012 14:27

I do as Peter does

I do a fixed asset register, too.

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